Retirement Investment Strategies

Even when retirement seems years away, it’s important to save and invest for your future. The sooner you start, the longer the money you invest has to grow—especially when sheltered from tax in an RSP, TFSA or similar registered investment. By starting sooner, you have the potential for greater retirement savings and income when you stop working.

Know Your Goals

The key to preparing for retirement during your working years is to successfully balance expenses and savings. But first you should determine how much you need for retirement. That means having firm goals and knowing how much money it will take to meet those objectives.

At times it may seem difficult to strike a balance between expenses and savings. That’s especially the case when you’re younger and have considerable financial commitments—such as paying off a mortgage, raising children and saving for children’s education. Plus, there are other financial needs to consider. For example, have you saved enough for an emergency fund? Are you protecting your income against disability or long-term illness through appropriate insurance products?

Save More As You Grow Older

As you progress through your working years you should be able to set aside more for retirement. Some expenses will be lower. For example, your mortgage might be paid off. And your salary is likely to rise, giving you more latitude to set money aside.

If you have a workplace pension plan, it’s critical to understand how it will contribute to your retirement. How much income is it likely to provide when you retire? If you don’t have a pension plan, saving for retirement becomes even more important.

Start With Growth

In your early working years, it’s a good time to focus on growth investments. These can include equities, mutual funds that invest in stocks and market-linked investments. These can help build retirement wealth faster because of greater returns potential. And while growth investments entail more risk than more conservative investments, your portfolio will have time to recover if it encounters volatility.

As you get older, move away from growth and focus on preserving some of the wealth you’ve accumulated. You can do this by including investments such as security mutual funds in your portfolio. However, growth should remain an important component of your portfolio throughout your working years.

Calculate your savings needs with our RSP Calculator.

As you begin to picture yourself in retirement, try to get a handle on how much you’re likely to spend every month. This will allow to you start thinking about how to best use your RSP funds, pensions and other sources of retirement income. Know how your investments and other income will be taxed in retirement; this will influence how much cash is available to you.

Will You Have Enough?

Does it look like you’ll have enough retirement income to meet your needs? If not, this is the time to explore other options. Can you generate income in other ways? Will delaying retirement and working for a few more years help?

Because retirement is near, you’ll need to take a more cautious approach with your investment portfolio. This is the time to move further toward capital preservation, and reduce the risks associated with growth investments in your portfolio. You’ve worked hard to build retirement wealth, and you don’t want to invest in a way that could suddenly or significantly reduce what you’ve accumulated.

Preserve Capital

A portfolio oriented toward capital preservation should have an increased focus on conservative, less volatile investments. These include security mutual funds and GICs. However, keep an element of growth in your portfolio to take advantage of equity market opportunities and ensure your investment returns outpace inflation. If returns are below inflation, you lose purchasing power.

Contribute Your RSP Maximum

Make sure you continue to contribute your yearly maximum to your RSP. Your contribution years are winding down, so make the most of an RSP while you can. If you have unused RSP contribution room from past years, use it to build retirement savings. You may also be able to build retirement savings and reduce income taxes in retirement through a spousal RSP. Also, take advantage of other tax-deferred savings vehicles, such as a TFSA.

Being newly retired is all about making adjustments, both emotionally and financially. You'll have a new lifestyle. You'll rely on new sources of income. And you'll have new or different expenses compared to your working years.

Make Your Money Last

One of your biggest concerns will be making your money last through retirement. No matter what life brings, you need to know that you'll always have enough income. Your investments and expenses should be managed with that in mind.

How much you spent will greatly influence how long your money lasts. By now you should have a realistic picture of what you can reasonably expect in terms of monthly income, and how to manage your spending so that income will last.

Focus On Security

This is when you need to focus on security. Your investment portfolio must reflect the fact that you could live in retirement for 20 to 30 years or more. That means an increased focus on generating income and preserving capital. This is when you need to concentrate on maintaining the money you’ve accumulated, at the same time using it to generate retirement income. There’s still a place for growth investments in your portfolio, but these should represent a much smaller proportion of your overall investments than during your working years.

Consider allocating your portfolio across three major investment categories: secure assets to guarantee an income stream; assets that offer capital protection and which can be used to generate income over the medium term; and growth assets to meet long term needs. Growth investments can provide a buffer against inflation. But because these are higher-risk investments, don’t go overboard at this stage of life. You may not have time to recover from a serious decline in your portfolio if growth investments encounter severe volatility.

Know Your Income Options

At some point you’ll have to convert your RSP to an income option, such as a RIF or an annuity. You can wait, but not too long. Government regulations require you to collapse your RSP by the end of the year in which you turn 71. Investigate which options will work for you, when it makes sense to wind up your RSP and how to go about making the conversion when the time comes.

How long you wait will depend to some extent on your other sources of retirement income. Income from a workplace pension and government pensions, such as the Canadian Pension Plan/Quebec Pension Plan might allow you to delay collapsing your RSP and give your investments more time for tax-sheltered growth.

As you live in retirement, you’ll have new questions about how to make the most of your money. You might also be planning to leave a legacy when you die. That means you’ll have the additional financial goal of preserving some of your assets for your children, grandchildren, charities or other heirs.

Your Choices Matter

Your life might even go in new directions. For instance, you might decide to become a “snowbird” and abandon cold Canadian winters every year. You might want to move elsewhere in Canada to be closer to loved ones. Or you might decide to move out of Canada permanently.

Your plans to leave a legacy, or any significant change in lifestyle, will affect how much you spend, how you invest, and how you deal with other assets, such as real estate. You’ll also require an estate plan and an up-to-date will. Estate planning can be complex, so it’s a good idea to seek professional advice.

Capital Preservation Is Important

No matter what your plans, capital preservation should be a key investment goal. Focus on conservative investments that are designed to protect capital so your money will always be there to finance your retirement. GICs, security mutual funds and income funds are conservative investments that offer capital protection.

Invest For Income Generation

Your investments must provide a steady stream of income during retirement. With a need for income, your portfolio should be flexible. Make sure you’re aware of the maturity dates of your investments so you’ll know when your money will be accessible during retirement.

If your money is in a RIF, your portfolio must be structured so that you can withdraw the government-required minimum (or more, if needed) from a RIF every year. Many of the same investments that help protect your capital can be used to produce income, such as GICs and income mutual funds.

Plan To Reduce Taxes

Taxes and tax planning are important considerations. Investigate ways to split income with your spouse to potential lower your combined tax bill in retirement.

For example, you can:

• Split up to 50% of income from RSPs and RIFs when you’re 65 or older
• Split half the income from registered pension plans at any age

Tax planning is also a key consideration in estate planning, both while you’re alive and when your assets are distributed upon your death.